Chapter 9, Problem 3PSB

Fishing Guides Co. has four employees. FICA Social Security taxes are 6.2% of the first $127,200 paid to each Problem employee, and FICA Medicare taxes are 1.45% of gross pay. Also, for the first $7,000 paid to each employee, the Company’s FUTA taxes are 0.6% and SUTA taxes are 1.75%. The company is preparing its payroll calculations for the week ended September 30. Payroll records show the following information for the company's four employees.

In addition to gross pay, the company must pay two-thirds of the 60% of the $50 per employee weekly health insurance; each employee pays the remaining 40%. The company also contributes an extra 5% of each employee’s gross pay (at no cost to employees) to a pension fund.
Required
Compute the following for the week ended September30 (Round amounts to the nearest cent):

1. Each employee’s FICA withholdings for Social Security.
2. Each employee’s FICA withholdings for Medicare.
3. Employer’s FICA taxes for Social Security.
4. Employer’s FICA taxes for Medicare.
5. Employer’s FUTA taxes.
6. Employer’s SUTA taxes.
7. Each employee’s net (take-home) pay.
8. Employer’s total payroll-related expenses for each employee.

Summary Introduction

Introduction: FICA withholdings for social security is a payroll deduction done by the employers and paid to the government. It is the withholding done to secure retirement and disabilities.

To compute: Each employee’s FICA withholdings for Social Security.

Explanation of Solution

Computation of each employee’s FICA withholdings for social security.

Particular	Amount
Person A
Maximum limit for FICA Social security tax	$127,200
Gross pay till September 23	$125,600
Remaining limit(A)	$1,600
Gross pay for current week(B)	$2,500
Gross pay on which tax has to be deducted(Lower of A & B)	$1,600
FICA social security tax rate	6.20%
FICA social security tax	$99.20
Person C
The maximum limit for FICA Social security tax	$127,200
Gross pay till September 23	$125,685
Remaining limit(A)	$1,515
Gross pay for current week(B)	$1,515
Gross pay on which tax has to be deducted(Lower of A & B)	$1,515
FICA social security tax rate	6.20%
FICA social security tax	$93.93
Person J
The maximum limit for FICA Social security tax	$127,200
Gross pay till September 23	$6,650
Remaining limit(A)	$120,550
Gross pay for the current week(B)	$475
Gross pay on which tax has to be deducted(Lower of A & B)	$475
FICA social security tax rate	6.20%
FICA social security tax	$29.45
Person M
The maximum limit for FICA Social security tax	$127,200
Gross pay till September 23	$23,700
Remaining limit(A)	$103,500
Gross pay for current week(B)	$1,000
Gross pay on which tax has to be deducted(Lower of A & B)	$1,000
FICA social security tax rate	6.20%
FICA social security tax	$62

Summary Introduction

Introduction: FICA withholdings for Medicare is a payroll deduction done by the employers and paid to the Internal Revenue Service. It is the withholding done to secure an employee from the financial distress of an unexpected medical emergency.

To compute: Each employee’s FICA withholdings for Medicare.

Explanation of Solution

Computation of each employee’s FICA withholdings for Medicare.

Particular	Amount
Person A
Gross pay of current week	$2,500
FICA Medicare tax rate	1.45%
FICA Medicare tax	$36.25
Person C
Gross pay of current week	$1,515
FICA Medicare tax rate	1.45%
FICA Medicare tax	$21.97
Person J
Gross pay of current week	$475
FICA Medicare tax rate	1.45%
FICA Medicare tax	$6.89
Person M
Gross pay of current week	$1,000
FICA Medicare tax rate	1.45%
FICA Medicare tax	$14.50

Summary Introduction

Introduction: Employer’s FICA taxes for social security is the contribution made by the employer for the employee’s retirement benefits and future survivorship.

To compute: Employer’s FICA taxes for Social Security.

Explanation of Solution

Computation of Employer’s FICA taxes for social security.

Particular	Amount
FICA social security tax of person A	$99.20
FICA social security tax of person C	$93.93
FICA social security tax of person J	$29.45
FICA social security tax of person M	$62
Total employer’s FICA taxes for social security	$284.58

Summary Introduction

Introduction: Employer’s FICA taxes for Medicare is the contribution made by the employer for the employee’s medical expenses. It is like a medical insurance premium of an employee.

To compute: Employer’s FICA taxes for Medicare.

Explanation of Solution

Computation of Employer’s FICA taxes for Medicare.

Particular	Amount
FICA taxes for Medicare of person A	$36.25
FICA taxes for Medicare of person C	$21.97
FICA taxes for Medicare of person J	$6.89
FICA taxes for Medicare of person M	$14.50
Total employer’s FICA taxes for Medicare	$79.61

Summary Introduction

Introduction: Federal unemployment tax act (FUTA) is a law applicable on employers. Under this act, tax is imposed on employer’s payroll expense to collect funds for the scheme made for removing unemployment.

To compute: Employer’s FUTA taxes.

Explanation of Solution

Computation of Employer’s FUTA taxes.

Particular	Amount
Person A
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till September 23	$125,600
Remaining limit(A)	$0
Gross pay for current week(B)	$2,500
Gross pay on which tax has to be deducted(Lower of A & B)	$0
FUTA tax rate	0.60%
FUTA tax	$0
Person C
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till September 23	$125,685
Remaining limit(A)	$0
Gross pay for current week(B)	$1,515
Gross pay on which tax has to be deducted(Lower of A & B)	$0
FUTA tax rate	0.60%
FUTA tax	$0
Person J
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till September 23	$6,650
Remaining limit(A)	$350
Gross pay for current week(B)	$475
Gross pay on which tax has to be deducted(Lower of A & B)	$350
FUTA tax rate	0.6%
FUTA tax	$2.10
Person M
Maximum limit of Gross pay for FUTA taxes	$7,000
Gross pay till September 23	$23,700
Remaining limit(A)	$0
Gross pay for current week(B)	$1,000
Gross pay on which tax has to be deducted(Lower of A & B)	$0
FUTA tax rate	0.6%
FUTA tax	$0
Total FUTA tax of Employer	$2.10

Summary Introduction

Introduction: State unemployment tax act (SUTA) is a law made to impose a tax on employers. The employers pay this amount to the state unemployment fund, established by the state government to remove unemployment.

To compute: Employer’s SUTA taxes.

Explanation of Solution

Computation of Employer’s SUTA taxes.

Particular	Amount
Person A
Maximum limit of gross pay for SUTA taxes	$7,000
Gross pay till September 23	$125,600
Remaining limit(A)	$0
Gross pay for current week(B)	$2,500
Gross pay on which tax has to be deducted(Lower of A & B)	$0
SUTA tax rate	1.75%
SUTA tax	$0
Person C
Maximum limit of gross pay for SUTA taxes	$7,000
Gross pay till September 23	$125,685
Remaining limit(A)	$0
Gross pay for current week(B)	$1,515
Gross pay on which tax has to be deducted(Lower of A & B)	$0
SUTA tax rate	1.75%
SUTA tax	$0
Person J
Maximum limit of gross pay for SUTA taxes	$7,000
Gross pay till September 23	$6,650
Remaining limit(A)	$350
Gross pay for current week(B)	$475
Gross pay on which tax has to be deducted(Lower of A & B)	$350
SUTA tax rate	1.75%
SUTA tax	$6.13
Person M
Maximum limit of Gross pay for SUTA taxes	$7,000
Gross pay till September 23	$23,700
Remaining limit(A)	$0
Gross pay for current week(B)	$1,000
Gross pay on which tax has to be deducted(Lower of A & B)	$0
SUTA tax rate	1.75%
SUTA tax	$0
Total SUTA tax of Employer	$6.13

Summary Introduction

Introduction: Take-home pay to an employee means the amount paid to an employee against their salary after deducting all the voluntary contributions and withholdings for which the employee is liable.

To compute: Each employee’s net (take-home) pay.

Explanation of Solution

Computation of each employee’s net (take home) pay.

Particular	Person A	Person C	Person J	Person M
Gross Pay	$2,500	$1,515	$475	$1,000
Less: Income Tax Withholding	($198)	($182)	($32)	($68)
Less: FICA social security tax	($99.20)	($93.93)	($29.45)	($62)
Less: FICA taxes for Medicare	($36.25)	($21.97)	($6.89)	($14.50)
Less: Weekly health insurance	($20)	($20)	($20)	($20)
Net (take home) pay	$2,146.55	$1197.1	$386.66	$835.5

Summary Introduction

Introduction: Payroll related expense are the expense related to the employees of the company which is incurred due to providing employment. All the payment made to employees, government and any other fund is included in it.

To compute:Employer’s total payroll-related expense for each employee.

Explanation of Solution

Computation of employer’s total payroll-related expense for each employee.

Particular	Person A	Person C	Person J	Person M
Gross pay	$2,500	$1,515	$475	$1,000
Employer’s FICA taxes for social security	$99.2	$93.93	$29.45	$62
Employer’s FICA taxes for Medicare	$36.25	$21.97	$6.89	$14.50
Employer’s FUTA taxes	$0	$0	$2.10	$0
Employer’s SUTA taxes	$0	$0	$6.13	$0
Employee weekly health insurance	$30	$30	$30	$30
Total payroll-related expense	$2,665.45	$1,660.90	$549.57	$1,106.50